Wednesday, March 23, 2011

While Wayne Swan has been busy playing down expectations about the tax talkfest ("it's a forum, not a summit") his prime minister has been building up expectations about the budget she will never be able to meet.

John F Kennedy talked of sending a man to the moon. Julia Gillard has talked of welfare reforms that could move as many as two million Australians into full-time work.

Its a big ask. Eight million of us already work full-time. Around seven million of working age don't, making two million an awfully big chunk.

In February Gillard told caucus she wanted "work not welfarism" and told the Committee for the Economic Development of Australia that "possibly as many as two million" Australians stood outside the full-time workforce in addition to those registered as unemployed.

She said around 800,000 were in part-time jobs and wanting more. Another 800,000 were outside the labour market, many discouraged, and there were also "many thousands of individuals on the Disability Support Pension who may have some capacity to work".

Her maths look dodgy given what she has in mind...
She has set up a task force to examine "incentives for such potential workers to rejoin the labour market, while also investing in the intensive support needed to lift their skills and job readiness" and this week outlined to caucus a crackdown on Newstart recipients who don't turn up to job interviews.

But the 800,000 she listed as wanting to work more hours presumably don't need a crackdown or extra incentives - by definition they already want to work more hours. The official figures do indeed show a further 800,000 Australians available to work and not actively looking - but they also show that one quarter of them are students, meaning they are probably not available for full-time work unless they abandon their studies, which is probably not what the government wants. And then there are the extra 400,000 potential full-time workers Gillard would need to bring the total up to 2 million.

She doesn't say where they are, other than to say that there are "many thousands of individuals of the Disability Support Pension who may have some capacity to work".

But the DSP is paid to around 800,000 people. Getting half of them into full-time work, while perhaps laudable, is unrealistic.

It is wise to abandon the image of a flood of newly-incentivised full-time workers just waiting for Gillard to tweak incentives and tighten penalties. It won't happen, and there is a chance that making NewStart even less attractive will make things worse.

NewStart is now scandalously low, so low the OECD has raised concerns about its adequacy. Gillard herself has refused to answer questions about whether she could live on it.

Simple economic theory would suggest the lower the rate of Newstart the more incentive someone will have to leave it for a job.

But it has fallen so low relative to other payments the more powerful incentive is to leave it for a more decent benefit.

Half of all entrants to the Disability Support Pension move there from unemployment. Once there most never leave except to die or to move on to the old age pension.

NewStart was once at a comparable level to the Disability Support Pension, but whereas the pension has been boosted from time to time, most recently in 2009, Newstart and its predecessors haven't been boosted since 1994, with the exception of the compensation package attached to the Goods and Services Tax.

Newstart is indexed, which is the nub of the problem. It increases in line with the consumer price index (typically at the rate of 2.5 per cent per annum) whereas the disability support and other pensions increase in line with average male earnings (typically 4 per cent per annum) or in line with one of a number of other measures if they increase faster.

Now only two-thirds of the pension, the Henry Review says Newstart will shrink to one-half of it by 2040 unless the indexation arrrangements change.

So stingly is Newstart in relation to the disability pension that according to the review a person receiving some of it and working 15 hours a week is only $2.67 per week better off than on the DSP.

The review finds "once a person receives a higher payment, there are strong reasons to avoid jeopardising it". It accepts that there are good theoretical reasons for keeping the unemployment benefit below the pension rate (one is designed as a short-term payment, the other determines a long-term standard of living) but it believes they have got too far out of whack and can see them getting worse.

In such a situation crackdowns on cheating of the kind planned for the budget will achieve little. They won't remove the big and continually growing incentive for someone who is out of work to to become and stay "disabled". To the extent that it makes like on Newstart even less comfortable it'll increase the incentive.

The Howard government's 2006 Welfare to Work reforms were designed to slow the flow of would-be workers into the DSP. They did for a while, and then people adjusted to the new rules and the effect faded.

As long as the DSP is far more attractive than Newstart the incentive will remain. Given that no government wants to be seen to cut a pension, the only way to do it is to increase Newstart and to have it indexed on the same basis.

It is counterintuitive to think that making it easier rather than harder to live on the dole might be the best way to increase the supply of potential workers.

But it is what Henry has found. Keeping Australians attached to the workforce is a goal too important to be sacrificed to slogans, or the desire for a balanced budget.

It might cost money, and it might be hard to explain, but we need to do everything we can not to lose a single worker to DSP.

Henry has presented the government with a road map. If it ignores it on budget night or does the opposite it needs to explain very clearly why.

4
comments:

@AndySHastings
said...

It's interesting to see the Prime Minister acknowledge all the people who don't have enough work, and the huge loss of productive capacity that goes with that.

What she doesn't acknowledge is that, far from people needing 'incentives' to find work or 'disincentives' to leave unemployment benefits, without an increase in aggregate demand there simply are not enough jobs around for people to find the employment they desire.

People don't choose to be on NewStart, they are there because they have no choice. When will the Government realise that to increase the participation rate and reduce underemployment there need to be more jobs available in our economy, and the only way to do that is to increase aggregate demand.

If the Government finally decided to meet its obligation to provide enough employment for all Australians that desire it and introduce an 'employer of last resort' scheme, I am sure we would see the kind of rise in participation that the Prime Minister seems to think she can magically produce out of thin air. (An employer of last resort scheme also has greater potential to offer jobs for people who might otherwise end up on the DSP for lack of suitable opportunities in the private sector.)

Bill Mitchell of CofFEE has been writing about this for some time. It's a real shame that the ALP has been captured by the prevailing paradigm of the OECD etc that suggests that we can't spend enough to fund the jobs so badly needed by the currently un- and underemployed.

The Australian social Inclusion board recently put out a report on "Addressing barriers for jobless families", which on page 10points out that long-term jobless families with children are increasingly appearing on DSP and Carers Payments - up 14% overall, but the number on DSP is up 16% and on carers payment it has increased by 45%. This is likely to partly reflect the greater attractiveness of these payments for lone parents compared to Newstart.

You make it sound as though unemployed people decide, 'Oh, I may as well become disabled or develop a serious chronic illness.' Take it from me, the DSP is very difficult to get. And what you may not realise is that thousands of people with chronic illnesses are actually on Newstart. This is what happens to anyone who doesn't fit the very strict criteria for DSP: you have to be unable to work 15 hours per week and your doctor has to state that your health will not change in the next two years. If you don't know whether or not you will improve within two years, you can't get DSP no matter how unwell you are. Many people with chronic illnesses are transferred from Newstart to DSP once they've been on Newstart for two years and it's clear they're not getting better. Perhaps this explains the large numbers of 'unemployed' going from Newstart to DSP.

Trust me, you can't just decide to move onto DSP because it pays better.